Economy of Ireland (EC2020) Tutorial 2 – MT Term Teaching Week 4

Economy of Ireland
(EC2020)
Tutorial 2 – MT Term Teaching Week 4
Plan for today
• Any issues/questions?
• Why study economic history review
• Question A2 (ii) 1960 to 1989
• Question A2 (iii) the economic reasons for and
against the formation of the euro and Ireland’s
experience first with EMS and to date with the euro.
2
Why study economic history?
• Tests Theory
• Gives Perspective
• Fascinates
• Debunks
• Instructs Policy
• Prevent/Challenge Misuses
3
1960 to 1989
• A2 (ii) In relation to historical economic events and
policy in Ireland, comment on the following, bearing
in mind the reasons for looking at history at all: 1960
to 1989
4
1960 to 1989
•
1950’s in Ireland (Failure or transition?):
•
Some bad news … but also some good news
•
Inefficiency of the pre-war protectionist policies were felt in the 1950’s (Fitzgerald)
•
Difficulties re-orientating to export markets, as its domestic industries were
inefficient due to operating in a protected domestic market.
•
Employment/Unemloyment; Emigration issues (wages higher abroad)
•
Overall, GDP per capita from 75% to 60% of EU average
•
Contrast with the post war boom in Europe
5
1960 to 1989
•
1960 – 1973 -- Growth!!!
•
Boom in Europe
•
Policy from the 1960’s (following on from the T.K. Whitaker ‘Economic
Development’ plan)
•
Export led growth - two pronged strategy:
• Trade liberalization (Why? And How?)
• Attracting MNCs (Why?)
•
Wage restraint (Why?)
•
Expansionary Fiscal policy
•
Solid institutional foundations
6
1960 to 1989
• How successful was this?
• Growth of 4.4% GDP per annum
• Immigration began
• Legacy of the 1960’s:
• Policy’s that resonate today!
• Preparedness for 1973
• 1973
•
•
•
•
Join the EU and becoming even more outward looking
Trade barriers fell further (all tariffs gone by 1977)
Effect of competition on firms
Platform to enter EU market for US companies
7
1960 to 1989
Did growth last?
• 1973 Oil shock (prices up by a factor of 4!!!) and
worldwide recession – supply shock
• Irish response:
• Keynesian response (to boost Aggregate Demand)
• Budget Deficit (1973 0.4% - 1975 6.8%)
• Growth in 1976 – 1979
8
1960 to 1989
•
Policy Error
•
•
•
•
•
Successive governments unwilling to reduce deficit.
Debt/GDP - 52% (1973) - 129% (1987).
Cost of servicing debt was 94% of income tax.
Tried to raise taxes but revenue stopped rising (theory?)
Bad to worse!
• Current account deficit widened to 15% of GDP … competitiveness problems!
(value of goods/services imported exceeding value of exports)
• Unemployment up to 18%!
• Political instability – 4 governments 1979-1982
• Speculation of devaluation in 1986 … £1bn capital outflow! (4 devaluations in
the 1980’s)
•
Why did this happen?
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1960 to 1989
•
Turning point in 1987 budget
•
•
•
•
Tight budget!
Deficit reduced to 1.7% of GDP through sharp cuts in government spending.
Capital spending cut too - housing hit hard.
By 1992, Debt/GDP below 100%.
•
Social Partnership (competitiveness)
•
EU money
•
Although by the 1990’s confidence returned, Debt/GDP had fallen, inflation was low and exports
boomed … unemployment stayed a big problem until 1994
•
Lessons for today/tomorrow?
10
Euro/EMS
• A2 In relation to historical economic events and
policy in Ireland, comment on the following, bearing
in mind the reasons for looking at history at all: (iii)
the economic reasons for and against the formation
of the euro and Ireland’s experience first with EMS
and to date with the euro.
11
Euro/EMS
•
EMS to Monetary Union:
•
Broke link with sterling and joined EMS (1979).
•
Economic Rationale – similar to the economic reasons for joining a
monetary union
•
Structure: ’fixed but floating’
•
Rocky Start, but finally paid off
•
Then... German Reunification
•
The UK leave the EMS, September 1992
•
Response - Monetary Union
12
Euro/EMS
Advantages of a Monetary Union
•
1) Inflation Anchor – Import Hawkish German inflation
• A) Businesses and consumers better able to make long-term decisions as
purchasing power of money will not be steadily eroded
• B) Low inflation then low interest rates (real and nominal) so more
investment
• C) Low inflation is self reinforcing
• D) avoid uncertainty; speculation; energy spent …
•
2) Diversification - Being tired to one market makes the market
more volatile (Exports 40% UK; 25% EU) – Potentially More
Stability in trade
13
Euro/EMS
Advantages of a Monetary Union Continued…
• 3) Competition – increased competition forces Irish
businesses to become more efficient
• 4) Lower transaction costs – currency exchange, time …
• 5) Transparency of prices – impact on trade and tourism
• 6) Debt credibility - Unable to use monetary financing.
So, avoid implicit default means a lower credit risk and,
therefore, lower interest rates on borrowing
14
Euro/EMS
Advantages of a Monetary Union Continued…
• 7) Stimulus to trans-European mergers (competition
with US and China) - Less regulatory red tape and
companies can benefit from economics of scale.
• 8) ‘Stepping stone’ to federal Europe - good or bad?
• Which ones do you think are most important to Ireland?
15
Euro/EMS
Disadvantages of a Monetary Union
•
1) Loss of monetary sovereignty – important for Ireland?
•
2) Other trading partners - Could argue that it hinders trade with other regions
•
3) Contagion effects –think banking (not understood 5 years ago)
•
4) Integration of the European market not complete in some important areas
•
5) Institutional framework was not in place (Banking union, EU financial
regulator, ESM, fiscal union?). Running before we were walking?
•
6) Differences in domestic policies across Europe - (e.g. Corporation tax, minimum
wage)
•
7) Inflexible Labor Market – contrast with US
16
Euro/EMS
Good times
• Cheap credit
• Greater credibility
• Stable exchange rate
• Lower inflation
• More attractive to US multinationals
• Artificially low interest rates
17
Euro/EMS
Eurozone Crisis (the bad times)
•
Artificially high interest rates! Monetary policy too tight.
•
Contagion
•
Slow policy responses
•
Different interests/countries want/need different policies
•
Showing up the disadvantages of an imperfect Monetary Union
•
Debate: Should Ireland leave the Euro?
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